Category Archives: Izabella Kaminska

Today there is a refresher on the current struggles in Monetary Economics. And again Izabella Kaminska in Aphaville share with us views and links about the topic.

So it seems that Paper Currency and the traditional forms of Central Government Money have their days counted. It is like one of my friend’s recent literary project: Unbelieving Count ( ….from the Portuguese Contagem Descrente). Anyway, back to Economics…..

The relevant Academic Kenneth Rogoff is recently working on this subject with interesting papers and opinion. With passages like this:

” The idea of raising target inflation to reduce the likelihood of hitting the zero bound is indeed an alternative approach. Blanchard et al. point out that if central banks permanently raised their target inflation rates from 2% to 4%, it would leave them scope to make deeper cuts to real interest rates in severe downturns. Arguably, paying negative interest rates is a better approach if, as many believe, inflation becomes more unstable as the general level of inflation rises. Robert Hall (1983) argues forcefully that the central role of monetary policy should be to provide a stable unit of account, and in principle the ability to pay negative interest rates facilitates its ability to achieve this in today’s low inflation environment (Hall, 2002, 2012).”

Rogoff explain us that there are challenges to the full implementation of Electronic cash, as the nature of fiat money systems expose them to fraud and tax evasion on massive and difficult to monitor scales:

” ….. There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax- or law-enforcement authorities. And yet there is a significant body of evidence that a large percentage of currency in most countries, generally well over 50%, is used precisely to hide transactions. I have summarized the international evidence in earlier research (Rogoff 1998, 2002). Other than the introduction of the euro, rather little has changed except that, if anything, anonymous currencies have continued to grow at a faster rate than nominal GDP.”

A somewhat vindication of the virtues of the European single currency, which I endorse in many ways. Interesting in all of this is the puzzle of the demand for money in current monetary systems with money not back by real safe assets. Here Kaminska on the subject: ‘‘The problem this poses for the public purse is that even though the substitution of paper cash for electronic cash should not theoretically affect seigniorage revenue for the government — because phased-out paper currency demand would be replaced by demand for electronic central bank reserves — the non-anonymous nature of electronic money would likely lead to a large shrinkage in demand.”

But, caveat emptor:

”In Rogoff’s opinion, Treasuries or other anonymous vehicles would have to absorb that loss instead.

The only caveat would be if the government managed to introduce a fully anonymous electronic money in its own right.

As he notes:

The government would continue to garner seigniorage revenues from the underground economy and the problem of the zero bound on nominal interest rates would be effectively eliminated. That said, it is far from clear that the government can credibly issue a fully anonymous electronic currency and even if it could, anonymous electronic fiat money has all the drawbacks of an anonymous paper currency in facilitating tax evasion and illegal activity.”

Fascinating subject, certainly. And a subject that should spark interest with anyone with ability to think through and who likes to hypothesise and suggest ways forward, which Izabella encourages in the rest of entry:

”Rogoff also suggests that any attempt to introduce a fully anonymous state currency would probably transform the central bank into a universal bank — something we’ve suggested is already happening due to the Fed already expanding its balance sheet to money market funds.

Rogoff says that might not be so bad if there were rules and protocols in place to ensure the government could not abuse its unique information advantage in that regard.

Nevertheless, none of this spares the country from the risk that another country’s paper currency might end up becoming used more commonly in the economy instead.

Overall, Rogoff concludes further study of the costs and benefits of phasing out paper currency is necessary, especially since we may already live in the “twilight of the paper currency era anyway”.

In any case, a few points we’re left confused about:

1) First, Rogoff claims that if there were concerns about anonymous digital central bank cash, people would likely park money in Treasuries instead and that this would reduce seigniorage income.

Surely, this thinking doesn’t make sense? Wouldn’t the money redirected from zero-yielding cash, which is provided by the government on demand (especially so that it is always zero yielding), be redirected into yielding securities in such a way that it would have negative yielding effects? If that’s the case the negative rates provided to the government would be a form of seigniorage revenue, and could be exploited by greater borrowing at zero rates.

2) Second, doesn’t Rogoff neglect the seigniorage revenue that’s already being lost — irrespective of anonymity — due to the shortage of safe assets problem? The market also has a preference for creating private money substitutes — whether they’re bearer notes collateralised by art, collateralised commodities in no-man’s land stores or bitcoin — rather than taking on more free debt. After all, the former currently allocates the money much more questionably than structured public policy might do.

3) Why has no-one yet made the connection between anonymity — which is injected into the system by means of anonymous bearer currency which “neither buyer nor seller requires knowledge of its history” — and our inability to model or control systemic risk?

All thoughts appreciated.”

Good thinking and significant suggestions will certainly be appreciated.